Professor tells BBC banks look strong after stress tests

01 December 2015

  • Bank of England conducts its second round of stress tests
  • UK's biggest lenders pass test with RBS and Standard Chartered the weakest
  • Professor Thannassoulis believes tests show UK banks are looking strong
  • He believes tests are worthwhile to keep the banks on their toes

John Thanassoulis, Professor of Financial Economics at WBS, has told the BBC the latest round of Bank of England (BoE) stress tests show that while the UK is out of the financial crisis, the banks are still under strict controls.

In what is now the second year the BoE has conducted stress tests - designed to test the durability of the UKs banks against hypothetical scenarios such as an economic crisis or slump in the price of oil for example - all but two of the banks passed with flying colours.

Royal Bank of Scotland (RBS) and Standard Chartered were found to be the weakest of Britain's seven largest lenders in the test, but no bank was ordered to devise a new capital plan.

The results show the main UK banks are building a strong resilience to external shocks, according to Professor Thanassoulis.

Professor Thanassoulis said: “What the latest stress tests show is that we are out of the financial crisis – as all of the banks have passed – although two came close to not passing the test: Standard Chartered and RBS. But they were let through because they have plans to raise some more capital this year.

“It was a test about tail risk that is checking if the banks were robust to deal with, in particular, big problems in China and emerging markets. This is why Standard Chartered, which does a lot of its business in those markets, was called up."

With none of the banks failing the test, the results show high regulatory controls may no longer be required, but Professor Thanassoulis believes it is too early to say exactly when or how the BoE might loosen its grip on British banks.

“What’s interesting is even though we’re out of the financial crisis; we’re not so far out that the Bank of England is going to rein in on the banks. It is still warning them they are likely to need what it calls a ‘countercyclical capital buffer’ and is looking closely at the buy- to-let mortgage market for example," added Professor Thanassoulis.

“Consequently the Financial Policy Committee, part of the BoE, is in a dilemma. If they do act to strengthen the system further, for example with the countercyclical capital buffer, then they will be in effect tightening monetary policy, which is not good for the UK with inflation so subdued.

“The banks have, by international standards and compared to the past, a lot more financial capital than they used to – up to around 13 per cent risk weighted assets, which is in line and better than most international laws."

In total, seven banks were tested: RBS, Lloyds, Nationwide Building Society, HSBC, Barclays, Santander UK and Standard Chartered. Last year the Co-Operative Bank was also included, but the BoE this year declared it would only be testing those lenders with £50 billion or more in deposits.

Whether the BoE continues with its stress tests beyond those already planned - the next is designed to examine the state of the UK economy and the financial market cycles - remains to be seen, but Professor Thanassoulis certainly believes them to be worthwhile.

Professor Thanassoulis said: “The tests were brought in to try to give investors’ confidence in the height of the financial crisis – to show them that this was the lowest that it could go, a bottom underneath which banks would never fall below.

“Now, moving out of the financial crisis there is a risk banks may stop listening. But I believe it is a useful exercise, it keeps the banks on their toes and gives the Bank of England a focus for their investigations with different banks.”

John Thanassoulis teaches Corporate Finance on both the Executive MBA and Executive MBA London.

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